Globalisation: The Challenge for Pakistan

Khalil HamdaniGraduate Institute of Development StudiesLahore School of Economics26 March 2015

Our globalisation challenge

• 30 years of globalisation have seen booms and busts, and also remarkable economic transformation in Asia

• Why is Pakistan not getting rich in rising Asia?

• What have we not done?

• What are we doing wrong?

• What should we do better?

Globalisation in brief• Deepening international production led by TNCs, FDI, and global value chains

• Industrial production is in constant makeover and processes get outmoded more rapidly than capital depreciation

• Externality: enterprises may carry on doing the same while economy can fall behind globally (blind spot)

• Cross-border connectivity can stimulate industrial transformation

• Role for public institutions and industrial policy

Trade openness

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

10

20

30

40

50

60

Bangladesh India Pakistan

Exports + Imports % of GDP

Pakistan was open

Pakistan imports technology goods but does not export technology products

Openness: foreign direct investment

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

2

4

6

8

10

12

14

16

18

Bangladesh India Pakistan

FDI inward stock % of GDP

FDI is extractive & market seeking not export oriented

Pakistan was open

Global value chains• Pakistan is integrated but has moved down the garments value chain, with expansion in low value and slow growth segments

• Bangladesh has moved up the garments value chain and is a top global exporter

Exports in global value

chains

Bangladesh 36%

India 36%

Pakistan 40%

Pakistan: exports undercut by terms of trade

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

20

40

60

80

100

120

140

160

Terms of tradePurchasing power of exports

Index 2000=100

India’s exports are more diversified and gained in price and value

Complications• Demographic dividend has created a rising middle class which demands consumer goods

• Worker dividend has generated large inflows of remittances that supplement low incomes and finance trade deficits

• People are getting rich but the economy cannot sustain high consumption, low investment growth

Consumption: high in Pakistan

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

50

60

70

80

90

100

79

69

93

65

Bangladesh IndiaPakistan Developing economies

% of GDP

Capital formation: very low in Pakistan

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

5

10

15

20

25

30

35

28.7

32.1

13.3

Bangladesh IndiaPakistan Developing economies

GFCF % of GDP

Threshold for dynamic growth

Economic growth: slowing in Pakistan

1970s 1980s 1990s 2000-05 2005-08 2008-130.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

6.26.7

2.9

5.4

Bangladesh IndiaPakistan Developing economies

annual average real GDP growth rate, %

Pakistan is managing external balance well but neglecting need for dynamic growth

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 201260

70

80

90

100

110

120

Bangladesh India Pakistan

Real effective exchange rate, index 2000=100

Pakistan rupee fluctuated in narrow band

Technological capabilities: low & stagnant

1990 1995 2000 2005 20100

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Bangladesh India Pakistan

UNIDO index of industrial competitiveness

China up 0.16 to 0.33

Pakistan lagging on education and skills

Government should fast-track Vision 2030

• Diversify existing industrial base (technological upgrading, linkages, exports)

• Target growth industries

• Restructure state enterprises

• Encourage SMEs and entrepreneurship development

• Develop clusters of knowledge-based activities

• Education and managerial programs

• Regulatory reform

Summary• Domestic markets do not generate adequate incentives to engage in the global economy

• TNCs see Pakistan not as an export platform but as a location for extraction and as a market

• Exports is a blind spot that needs closing

• Government should work with industry to develop export potential and better integrate Pakistan into international production

Conclusion: beware of half truths

✘Large economies do not need to globalise

✘Openness defines success in globalisation

✘Technology is a quick fix

✘Manufactures are better than commodities

✘Manufactures are better than services

✘Tradable and non-tradable sectors differ